Innovation: The regulatory opportunity

Speech by Martin Wheatley, Chief Executive of the FCA, at the Financial News Conference, London. This is the text of the speech as drafted, which may differ from the delivered version.

The FCA is now running a full time Innovation Hub. This team is dedicated to supporting innovation in financial services, Innovation that can genuinely improve the lives of consumers.

First of all, I want to thank Thorold and Gren for the invitation to speak here today. This is a fantastic venue, from my perspective, fantastic timing too. I am giving an update today on Project Innovate[1], an FCA initiative to foster innovation in financial services. Today marks a key milestone.

So it is a real pleasure to be speaking to you today. An audience which includes the Financial News’ Fintech 40- the biggest influencers in the European fintech scene. I don’t count myself as part of that group, by the way, but my organisation does want to support, and in our own way enable the entire sector.

To that end, in July, we set out our proposals for Project Innovate. We asked for written responses and we also hosted roundtables. We were a bit worried at first. A couple of dates clashed not only with summer holidays but also the final week of the Commonwealth Games. But we ended up oversubscribed -we hosted extra sessions to hear from as many people as possible. As part of these sessions we also asked participants to describe regulatory barriers to innovation. We talked about Project Innovate with industry bodies, such as Innovate Finance and TechCityUK. And we joined roundtables that they hosted. All in all, we gathered a broad evidence base.

The engagement was enthusiastic -we received great feedback and lots of useful suggestions. The headline was that almost everyone wanted what we proposed. Naturally – they wanted it yesterday. That’s quite difficult. But in the space of five short months we have gone from idea to action.

I will use my time today to answer two questions; question one - why are we doing this? And question two - what will we do?

Why we are doing this

21,000 years in the future, humanity has settled on countless planets. Science and technology are extremely advanced. But regulation has still restricted innovation. Artificial intelligence and even advanced computers are prohibited.

This is – of course – the universe of the Dune saga, by Frank Herbert. In one of his books he writes that, ’there is little that bureaucrats hate more than innovation.’ Well, I’ve never fancied myself as a bureaucrat. But innovation isn’t easy. He explains that bureaucrats especially hate innovation that produces better results. Why? Because “improvements always make those at the top of the heap look inept. And who enjoys appearing inept?” I don’t. But I do think we are better served embracing, rather than restricting innovation.

One of the big differences between the FCA and the FSA is that we have an objective to promote competition. Innovation can be a driver of effective competition, so we want to support innovation. More generally, the FCA is here to make financial markets work well for consumers. Innovation can benefit consumers, whether by reducing hassle, reducing costs or improving products. So we want to ensure that regulation unlocks these benefits, rather than blocks them.

Within the last 18 months we have seen a proliferation of new technologies for making payments. There is a wave of innovation in financial services taking place right now.

We also think this is an important time to support innovation. Paul Volcker spoke about innovation at another Wall Street Journal event[2] a few years back. He described the ATM as the only useful financial innovation of the past 25 years. I would probably also mention internet banking and Chip and PIN. These are important developments in recent history. Nevertheless, I would argue that innovation has not fundamentally transformed the sector. Not in the way that it has for retail, or newspapers or telecoms. But this is changing.

In the last few years we’ve seen mobile banking gain significant traction. In 2013 over a quarter of us used our mobiles to check bank balances. This figure is clearly on an upward trend. Crowdfunding platforms raised $1.5 billion worldwide in 2011. Last year that figure had grown to $5 billion. In the UK the alternative finance market stood at £492 million in 2012. It was estimated to be £939 million just one year later. And within the last 18 months we have seen a proliferation of new technologies for making payments. There is a wave of innovation in financial services taking place right now.

Finally, we are doing this because innovators told us that they need our help. Much innovation in financial services comes from start-ups and from outside the regulated sector. Traditionally, regulators have focussed resources on the biggest players. But we realise that if we want to support innovators, we need to take a different approach. Small start-ups can’t afford an army of compliance consultants. Businesses we don’t regulate, like software companies, still drive innovation in financial services. So we are engaging directly with a new population.

Today is the first day for the Innovation Hub. But in getting here, we’ve met with a lot of innovators. So we have some idea of the types of innovation we might see in the coming months. And the common thread is always a desire to solve a problem.

Like the problem faced by people who have just moved here. They might have a good job and a great credit history back home. But a thin UK credit file is counted as a black mark against them. This isn’t just about getting loans. Even a standard mobile phone contract needs you to pass a credit check first.

We met a business trying to fix this - Aire. They want to bring the consumer back into the picture and empower the consumer to fill in the blanks. You can provide information about your academic background, social media activity or salary. They can even assess your writing style. All of these metrics are used to paint a richer picture of your ability to repay. Their software then provides an alternative credit score. There are checks and balances. Anyone can fake a LinkedIn profile, but it’s a lot harder to fake the network that goes with it. The credit score can then be sold on to banks and other businesses. The appeal from a buyer’s perspective is that this could potentially unlock an unserved market. For the consumer it could solve a real headache.

Another problem consumer’s face is the hassle of filling forms another form every time you use a new financial provider. We met a start-up called 'yoyoData' looking to solve this. They are developing a platform to allow you to manage a single data profile online. The idea would be to then share a slice of this profile directly with a financial institution. This will give you complete control over what data you share. Crucially, it will help you avoid the hassle of entering the same data over and over again.

Although not all innovators will need our help, a business called 'MarketIQ' told us that they can predict the future. If that’s true, perhaps they can help us instead.

Project Innovate is here to stay. Our commitment to fostering innovation in the interests of consumers is not a fad. It is now an important part of our regulatory philosophy. Opening our Innovation Hub is the first concrete output. But we will continue to adapt our approach. We will keep an open mind about what else we can do.

What we will do

So to help us help them, we will be giving informal steers. This is different from more formal guidance -firms will rely on what we tell them at their own risk. But it means we can share our thinking a lot more quickly.

So – what is the Innovation Hub doing? There are two main strands to its work. The first strand is giving direct support to innovators. The second is considering how we adapt the regulatory regime to foster innovation.

We have a menu of direct support. To start - help for innovators to navigate regulation. This could be for an established firm developing an innovative new product. It could also be for a start-up deciding which market to target. Or for a tech firm snubbed by banks who won’t buy until a compliance question is answered. We know that for many innovators, time is of the essence. So to help us help them, we will be giving informal steers. This is different from more formal guidance -firms will rely on what we tell them at their own risk. But it means we can share our thinking a lot more quickly.

Second item on the menu- supporting innovators who want to be authorised. We know that the process can be daunting -we want to demystify it and provide additional support to innovators. This means a lot of face-to-face engagement before a formal application is submitted. It means identifying early any likely areas of complexity. This will help us to line up the right resource internally. To ensure the application is processed as quickly as possible.

And finally – working with firms to test innovative tools. We will begin with new approaches to disclosure. Behavioural economics is being used by big banks and others. They are developing new ways of giving information to customers. We want to work with these firms to see if, for example, customised videos are more effective than ink and paper. We will then use what we learn to update our rules.

A surgery on 5 December to help start-ups understand how to get authorised.

On to the Innovation Hub’s second strand of work, it will identify policies and processes that need to change to support innovation. We will actively gather intelligence through an extensive programme of engagement with innovators.

Some nuggets will be found through the direct support. And we will host roundtables, surgeries and other events. You can book on to the first of these on our web pages now. A surgery on 5 December to help start-ups understand how to get authorised. We will use events like this to support innovators on common problems. We will also ask participants to identify burning issues and for their help in designing solutions.

Priority challenges

We have already identified some priority areas that we want to tackle.

The most cross-cutting, immediate problem facing a range of innovators is a basic one; getting a bank account. This has become a high profile issue across the country. Affecting money remitters, charities, the House of Lords. We will not interfere with legitimate commercial decisions by banks. But we are serious about supporting innovators. So we are thinking creatively about how we might be able to help. We know that this is a pressing issue, so we will keep you updated on progress.

Next up, regulatory uncertainty. This creates particular problems for innovators. Disruptive innovation, of the Clayton Christensen variety, upsets the status quo. This is a challenge for other players. It is also a challenge for the rules of the game. It means that an innovator might get conflicting interpretations from different lawyers. And talking to one lawyer is expensive enough. We hope to tackle this through the work of the Innovation Hub itself. By giving informal steers to innovators to provide clarity, or if needed, by adapting our rules to bring them up-to-date.

A specific example was raised over the summer, regulatory uncertainty in relation to digital currencies. In August, the Chancellor of the Exchequer announced a major programme of work looking into this area. We are actively engaging with the Treasury on this. We want to understand what role regulation should play. We are also interested in exploring possible benefits from block-chain technology. How it might be used elsewhere in financial services.

Finally, one issue raised is very much in our own hands. We were asked to modernise, move away from paper-based processes, improve the content on our website and make it easier to use. Problems with the website especially affect small innovators. It is their main source of information about regulation.

For authorisations, we have recently launched a new online submission website. This enables firms to submit a number of applications electronically. During 2015, we will move even more processes online.

As for the website, I agree that it needs improving. As a short-term fix, we will build a micro-site for our Innovate pages. This will allow more functionality and a better user experience. In the longer term, we will improve the existing website wherever we can. We have captured the suggestions made over the summer and some businesses kindly offered to help us make the changes. We may well take them up on that.

Nuts and bolts

I am going to finish up with the practical nuts and bolts. How this will work in practice.

But first, I just want to respond to a fear recently expressed in some parts of the compliance press. A fear that this is somehow all very unfair, that we are giving innovators special treatment and that this is subsidised by everybody else.

First of all, let me be clear. We are indeed focused on giving extra support to innovators. Innovation can bring benefits to consumers and our mission is to markets work well for consumers. Also, innovators have a particular need for our help in navigating regulation. They are less likely to fit neatly within existing regulatory categories.

Secondly, I think the fear is rooted in misconceptions about this work. For a start, regulated firms are in scope. As well as this, the largest firms already have direct access to the regulator through their supervisors. What we are doing here is going some way to redressing that imbalance. I certainly don’t see that as unfair.

So, with that said – on to the nuts and bolts. We have all the relevant information on an Innovate section of our website. Through those pages, firms can submit a request for support. We will need to prioritise our resources. So unfortunately we will have to say ’no’ sometimes. But we want to be transparent about the criteria we are using and we have published these on the website too.

We certainly don’t want to impose extra bureaucracy. Yes, we have created a template. You need to fill this in to request our support. But please do send us anything you already have, like a pitch deck, so you don’t duplicate effort.

This will be a personalised experience and you won’t face a lengthy delay and you won’t receive a series of generic responses. If we have further questions, we will pick up the phone. If we are providing support, we’ll be flexible. Face-to-face meetings, or phone calls, or video-conferencing – whatever works best. Staff from the Innovation Hub are here today, so do make contact and ask them any questions you might have.

Conclusion

I’d like to tell you one last story before wrapping up.

Let me take you back to May this year. We had just started to think about doing more to support innovation. So we worked with New Finance to organise an informal surgery for fintech entrepreneurs. At the surgery, they could talk to FCA staff face-to-face. We covered hot topics such as authorisations, data and payments. It was a low key event and we didn’t spend any money marketing it. Despite this, we were quickly fully booked.

One attendee flew over from Italy. He had launched a fintech business back home but was considering moving it to London. He told us how shocked he was when he saw the event online. Shocked that a regulator was willing to engage with innovators; so shocked that as soon as he saw it, he booked his flight. He didn’t even wait for confirmation that we still had space. I’m very glad to say that this story has a happy ending. He got the last spot.

We’ve moved with pace. The start-up motto is to ask for forgiveness, not permission. We also won’t have got this 100% right first time. So we are going to keep asking how to make it work better. But one thing isn’t changing. Our commitment to supporting innovation is here to stay.

Innovation: The regulatory opportunity

Speech by Martin Wheatley, Chief Executive of the FCA, at the Financial News Conference, London. This is the text of the speech as drafted, which may differ from the delivered version.

The FCA is now running a full time Innovation Hub. This team is dedicated to supporting innovation in financial services, Innovation that can genuinely improve the lives of consumers.

First of all, I want to thank Thorold and Gren for the invitation to speak here today. This is a fantastic venue, from my perspective, fantastic timing too. I am giving an update today on Project Innovate[1], an FCA initiative to foster innovation in financial services. Today marks a key milestone.

So it is a real pleasure to be speaking to you today. An audience which includes the Financial News’ Fintech 40- the biggest influencers in the European fintech scene. I don’t count myself as part of that group, by the way, but my organisation does want to support, and in our own way enable the entire sector.

To that end, in July, we set out our proposals for Project Innovate. We asked for written responses and we also hosted roundtables. We were a bit worried at first. A couple of dates clashed not only with summer holidays but also the final week of the Commonwealth Games. But we ended up oversubscribed -we hosted extra sessions to hear from as many people as possible. As part of these sessions we also asked participants to describe regulatory barriers to innovation. We talked about Project Innovate with industry bodies, such as Innovate Finance and TechCityUK. And we joined roundtables that they hosted. All in all, we gathered a broad evidence base.

The engagement was enthusiastic -we received great feedback and lots of useful suggestions. The headline was that almost everyone wanted what we proposed. Naturally – they wanted it yesterday. That’s quite difficult. But in the space of five short months we have gone from idea to action.

I will use my time today to answer two questions; question one - why are we doing this? And question two - what will we do?

Why we are doing this

21,000 years in the future, humanity has settled on countless planets. Science and technology are extremely advanced. But regulation has still restricted innovation. Artificial intelligence and even advanced computers are prohibited.

This is – of course – the universe of the Dune saga, by Frank Herbert. In one of his books he writes that, ’there is little that bureaucrats hate more than innovation.’ Well, I’ve never fancied myself as a bureaucrat. But innovation isn’t easy. He explains that bureaucrats especially hate innovation that produces better results. Why? Because “improvements always make those at the top of the heap look inept. And who enjoys appearing inept?” I don’t. But I do think we are better served embracing, rather than restricting innovation.

One of the big differences between the FCA and the FSA is that we have an objective to promote competition. Innovation can be a driver of effective competition, so we want to support innovation. More generally, the FCA is here to make financial markets work well for consumers. Innovation can benefit consumers, whether by reducing hassle, reducing costs or improving products. So we want to ensure that regulation unlocks these benefits, rather than blocks them.

Within the last 18 months we have seen a proliferation of new technologies for making payments. There is a wave of innovation in financial services taking place right now.

We also think this is an important time to support innovation. Paul Volcker spoke about innovation at another Wall Street Journal event[2] a few years back. He described the ATM as the only useful financial innovation of the past 25 years. I would probably also mention internet banking and Chip and PIN. These are important developments in recent history. Nevertheless, I would argue that innovation has not fundamentally transformed the sector. Not in the way that it has for retail, or newspapers or telecoms. But this is changing.

In the last few years we’ve seen mobile banking gain significant traction. In 2013 over a quarter of us used our mobiles to check bank balances. This figure is clearly on an upward trend. Crowdfunding platforms raised $1.5 billion worldwide in 2011. Last year that figure had grown to $5 billion. In the UK the alternative finance market stood at £492 million in 2012. It was estimated to be £939 million just one year later. And within the last 18 months we have seen a proliferation of new technologies for making payments. There is a wave of innovation in financial services taking place right now.

Finally, we are doing this because innovators told us that they need our help. Much innovation in financial services comes from start-ups and from outside the regulated sector. Traditionally, regulators have focussed resources on the biggest players. But we realise that if we want to support innovators, we need to take a different approach. Small start-ups can’t afford an army of compliance consultants. Businesses we don’t regulate, like software companies, still drive innovation in financial services. So we are engaging directly with a new population.

Today is the first day for the Innovation Hub. But in getting here, we’ve met with a lot of innovators. So we have some idea of the types of innovation we might see in the coming months. And the common thread is always a desire to solve a problem.

Like the problem faced by people who have just moved here. They might have a good job and a great credit history back home. But a thin UK credit file is counted as a black mark against them. This isn’t just about getting loans. Even a standard mobile phone contract needs you to pass a credit check first.

We met a business trying to fix this - Aire. They want to bring the consumer back into the picture and empower the consumer to fill in the blanks. You can provide information about your academic background, social media activity or salary. They can even assess your writing style. All of these metrics are used to paint a richer picture of your ability to repay. Their software then provides an alternative credit score. There are checks and balances. Anyone can fake a LinkedIn profile, but it’s a lot harder to fake the network that goes with it. The credit score can then be sold on to banks and other businesses. The appeal from a buyer’s perspective is that this could potentially unlock an unserved market. For the consumer it could solve a real headache.

Another problem consumer’s face is the hassle of filling forms another form every time you use a new financial provider. We met a start-up called 'yoyoData' looking to solve this. They are developing a platform to allow you to manage a single data profile online. The idea would be to then share a slice of this profile directly with a financial institution. This will give you complete control over what data you share. Crucially, it will help you avoid the hassle of entering the same data over and over again.

Although not all innovators will need our help, a business called 'MarketIQ' told us that they can predict the future. If that’s true, perhaps they can help us instead.

Project Innovate is here to stay. Our commitment to fostering innovation in the interests of consumers is not a fad. It is now an important part of our regulatory philosophy. Opening our Innovation Hub is the first concrete output. But we will continue to adapt our approach. We will keep an open mind about what else we can do.

What we will do

So to help us help them, we will be giving informal steers. This is different from more formal guidance -firms will rely on what we tell them at their own risk. But it means we can share our thinking a lot more quickly.

So – what is the Innovation Hub doing? There are two main strands to its work. The first strand is giving direct support to innovators. The second is considering how we adapt the regulatory regime to foster innovation.

We have a menu of direct support. To start - help for innovators to navigate regulation. This could be for an established firm developing an innovative new product. It could also be for a start-up deciding which market to target. Or for a tech firm snubbed by banks who won’t buy until a compliance question is answered. We know that for many innovators, time is of the essence. So to help us help them, we will be giving informal steers. This is different from more formal guidance -firms will rely on what we tell them at their own risk. But it means we can share our thinking a lot more quickly.

Second item on the menu- supporting innovators who want to be authorised. We know that the process can be daunting -we want to demystify it and provide additional support to innovators. This means a lot of face-to-face engagement before a formal application is submitted. It means identifying early any likely areas of complexity. This will help us to line up the right resource internally. To ensure the application is processed as quickly as possible.

And finally – working with firms to test innovative tools. We will begin with new approaches to disclosure. Behavioural economics is being used by big banks and others. They are developing new ways of giving information to customers. We want to work with these firms to see if, for example, customised videos are more effective than ink and paper. We will then use what we learn to update our rules.

A surgery on 5 December to help start-ups understand how to get authorised.

On to the Innovation Hub’s second strand of work, it will identify policies and processes that need to change to support innovation. We will actively gather intelligence through an extensive programme of engagement with innovators.

Some nuggets will be found through the direct support. And we will host roundtables, surgeries and other events. You can book on to the first of these on our web pages now. A surgery on 5 December to help start-ups understand how to get authorised. We will use events like this to support innovators on common problems. We will also ask participants to identify burning issues and for their help in designing solutions.

Priority challenges

We have already identified some priority areas that we want to tackle.

The most cross-cutting, immediate problem facing a range of innovators is a basic one; getting a bank account. This has become a high profile issue across the country. Affecting money remitters, charities, the House of Lords. We will not interfere with legitimate commercial decisions by banks. But we are serious about supporting innovators. So we are thinking creatively about how we might be able to help. We know that this is a pressing issue, so we will keep you updated on progress.

Next up, regulatory uncertainty. This creates particular problems for innovators. Disruptive innovation, of the Clayton Christensen variety, upsets the status quo. This is a challenge for other players. It is also a challenge for the rules of the game. It means that an innovator might get conflicting interpretations from different lawyers. And talking to one lawyer is expensive enough. We hope to tackle this through the work of the Innovation Hub itself. By giving informal steers to innovators to provide clarity, or if needed, by adapting our rules to bring them up-to-date.

A specific example was raised over the summer, regulatory uncertainty in relation to digital currencies. In August, the Chancellor of the Exchequer announced a major programme of work looking into this area. We are actively engaging with the Treasury on this. We want to understand what role regulation should play. We are also interested in exploring possible benefits from block-chain technology. How it might be used elsewhere in financial services.

Finally, one issue raised is very much in our own hands. We were asked to modernise, move away from paper-based processes, improve the content on our website and make it easier to use. Problems with the website especially affect small innovators. It is their main source of information about regulation.

For authorisations, we have recently launched a new online submission website. This enables firms to submit a number of applications electronically. During 2015, we will move even more processes online.

As for the website, I agree that it needs improving. As a short-term fix, we will build a micro-site for our Innovate pages. This will allow more functionality and a better user experience. In the longer term, we will improve the existing website wherever we can. We have captured the suggestions made over the summer and some businesses kindly offered to help us make the changes. We may well take them up on that.

Nuts and bolts

I am going to finish up with the practical nuts and bolts. How this will work in practice.

But first, I just want to respond to a fear recently expressed in some parts of the compliance press. A fear that this is somehow all very unfair, that we are giving innovators special treatment and that this is subsidised by everybody else.

First of all, let me be clear. We are indeed focused on giving extra support to innovators. Innovation can bring benefits to consumers and our mission is to markets work well for consumers. Also, innovators have a particular need for our help in navigating regulation. They are less likely to fit neatly within existing regulatory categories.

Secondly, I think the fear is rooted in misconceptions about this work. For a start, regulated firms are in scope. As well as this, the largest firms already have direct access to the regulator through their supervisors. What we are doing here is going some way to redressing that imbalance. I certainly don’t see that as unfair.

So, with that said – on to the nuts and bolts. We have all the relevant information on an Innovate section of our website. Through those pages, firms can submit a request for support. We will need to prioritise our resources. So unfortunately we will have to say ’no’ sometimes. But we want to be transparent about the criteria we are using and we have published these on the website too.

We certainly don’t want to impose extra bureaucracy. Yes, we have created a template. You need to fill this in to request our support. But please do send us anything you already have, like a pitch deck, so you don’t duplicate effort.

This will be a personalised experience and you won’t face a lengthy delay and you won’t receive a series of generic responses. If we have further questions, we will pick up the phone. If we are providing support, we’ll be flexible. Face-to-face meetings, or phone calls, or video-conferencing – whatever works best. Staff from the Innovation Hub are here today, so do make contact and ask them any questions you might have.

Conclusion

I’d like to tell you one last story before wrapping up.

Let me take you back to May this year. We had just started to think about doing more to support innovation. So we worked with New Finance to organise an informal surgery for fintech entrepreneurs. At the surgery, they could talk to FCA staff face-to-face. We covered hot topics such as authorisations, data and payments. It was a low key event and we didn’t spend any money marketing it. Despite this, we were quickly fully booked.

One attendee flew over from Italy. He had launched a fintech business back home but was considering moving it to London. He told us how shocked he was when he saw the event online. Shocked that a regulator was willing to engage with innovators; so shocked that as soon as he saw it, he booked his flight. He didn’t even wait for confirmation that we still had space. I’m very glad to say that this story has a happy ending. He got the last spot.

We’ve moved with pace. The start-up motto is to ask for forgiveness, not permission. We also won’t have got this 100% right first time. So we are going to keep asking how to make it work better. But one thing isn’t changing. Our commitment to supporting innovation is here to stay.